Good morning, and welcome to VF Corporation's Third Quarter Fiscal 2019 Earnings Call.

Participants on today's call will make forward-looking statements. These statements are based on current expectations and are subject to uncertainties that could cause actual results to differ materially. These uncertainties are detailed in documents filed regularly with the SEC.

Unless otherwise noted, amounts referred to on today's call will be on an adjusted constant dollar basis, which we define in the press release that was issued this morning. We use adjusted amounts as lead numbers in our discussion because we believe they more accurately represent the true operational performance and underlying results of our business.

You may also hear us refer to reported amounts, which are in accordance with U.S. GAAP. Reconciliations of GAAP measures to adjusted amounts can be found in the supplemental financial tables included in the press release, which identify and quantify all excluded items and provide management's view of why this information is useful to investors.

During the first quarter of fiscal 2019, the company completed the sale of its Nautica brand business. During the first quarter of fiscal 2018, the company completed the sale of its Licensed Sports Group, or LSG, business. In conjunction with the LSG divestiture, VF executed its plan to exit the licensing business and completed the sale of the assets of the JanSport brand collegiate business in the fourth quarter of 2017. Accordingly, the company has included the operating results of these businesses in discontinued operations through their respective dates of sale. Unless otherwise noted, results presented on today's call are based on continuing operations.

Joining me on today's call will be VF's Chairman, President and Chief Executive Officer, Steve Rendle; and Chief Financial Officer, Scott Roe. Following our prepared remarks, we'll open the call for questions. Steve?

Thank you, Joe, and good morning, everyone. I could not be more proud of VF's third quarter performance. As I reflect back on my time as CEO, I'm reminded of the commitments we made in Boston almost 2 years ago. At that meeting, we stated our intention to increase the metabolic rate of the company while pursuing a specific set of strategic choices.

Today, we've made significant progress against those initiatives. And even in spite of the intense workload, our people delivered VF's strongest quarter in the last 2 years. My profound thanks to the dedication and hard work of our VF associates around the globe. I am proud to be part of this great team.

And I'd like to call out a few exceptional performances that we've seen over the past quarter. The North Face made significant progress in their journey to return to their rightful leadership position as the largest, most influential global outdoor brand. The brand's focus on purpose-led brand and product innovation is starting to gain attention and traction. My congratulations to the team. This has been an intense 2-plus-year journey. And while it's not complete, we're starting to see the hard work pay off.

Vans has delivered another exceptional quarter of growth, further cementing their rightful place as the #3 global sport lifestyle brand. While obviously a brand this size won't grow at these exceptional rates forever, we have great confidence in their ability to sustain double-digit growth by relying on Not Just One Thing, to drive this business to $5 billion by 2023.

Our international business remains resilient amid political uncertainty and macroeconomic pressures that we're reminded of every day. Our diversified international platform continues to deliver high single-digit growth.

We declared China a strategic investment priority, and it is paying off with over 20% growth in the quarter. In Europe, we've strengthened our platform and continued to broaden our brand offering, which has led us to consistent growth, tracking ahead of our long-range commitments.

And finally, our investments and focus in D2C continue to pay off with yet another strong quarter of double-digit growth led by digital. As we approach the VF and Kontoor brand separation, I am confident in our accelerated growth trajectory and the strategic positioning of our portfolio as we head into next year.

To address a topic that's likely on your mind, let me take a few moments on general market conditions. Geopolitical and macroeconomic events continue to cause volatility in the marketplace. While these events have the potential to disrupt our business and our consumers around the globe, to date, the impact to our business has been minimal. Now we are more closely monitoring conditions in certain markets such as China and the U.K. For our businesses, the overall consumer backdrop remains quite solid.

As it relates to trade, the impact to date has been de minimis. We continue to monitor the situation closely and are developing contingency plans for potential outcomes.

Now let's review a few highlights from our third quarter. Revenue increased 9% on an organic basis as our growth engines continue to fuel our results. Excluding Kontoor Brands, the VF RemainCo portfolio increased 12%. Our Big 3 brands grew a combined rate of 16%, with our Vans brand delivering another exceptional quarter of 27% growth. Importantly, growth for the Vans brand remains well balanced across channels, geographies and product categories, and the brand continues to focus on icon management and driving a head-to-toe approach with footwear and apparel up 25% and 23%, respectively.

The Slip-On surpassed the Old Skool this quarter as the fastest-growing icon, as the brand relentlessly pursuits it's Not Just One Thing mentality. Momentum in The North Face brand continues to build with a 16% increase driven by double-digit growth in all channels and geographic regions. The Americas business increased 15% driven by 9% growth in D2C and a 25% increase in wholesale. The actions we've taken to reposition the brand in the marketplace continue to yield results, and we are confident in the growth trajectory of this brand heading into next year.

Earlier this month, at the Consumer Electronics Show, The North Face unveiled FUTURELIGHT, a new breathable waterproof material set to the revolutionize the future of technical fabrics that will be available to consumers in fall 2019. FUTURELIGHT was awarded the top honor in the best emerging tech category in Digital Trends Top Tech of the CES awards. Initial indications in the marketplace are promising that FUTURELIGHT will be one of the most dynamic textile innovations the Outdoor industry has seen in years.

As a result of our strong performance this quarter and our increased confidence in our growth trajectory, we are again raising our full year revenue and earnings growth outlook for fiscal 2019. Our updated outlook now includes 13% revenue growth and 20% earnings growth, or 8% revenue growth and 16% earnings growth on an organic basis. Our updated outlook also includes $45 million of incremental growth-focused investments.

Consistent with last year, as our business outperformed our expectations, we've invested more in demand creation, our digital, data and in-store platforms, and design and innovation, all through the lens of driving our purpose-led vision.

I'd like to take a moment and briefly update you on our upcoming spin-off of Kontoor Brands and the relocation of our Outdoor brands and corporate leadership teams to Denver. We are well positioned for an end of April 2019 separation. Our organization, Board of Directors and external advisers continue to work diligently to ensure both VF and Kontoor are set up for a seamless transition and positioned for success. We will have more specific details regarding the separation in the coming months.

In Denver, we're in the process of creating an environment that embodies our purpose-led, performance-driven culture. The moves will commence in June and should be completed by the end of the year. While it's still early, approximately 90% of the brand and corporate leadership teams have committed to make the move so far. We'll have line of sight to the total employee population acceptance rate by the end of the quarter. The upfront planning, coupled with our early acceptance results, gives us increasing confidence that this move will put us in a stronger position for the future.

And in summary, we remain sharply focused on executing our integrated growth strategy in transforming our business into a purpose-led, performance-driven enterprise capable of and committed to delivering superior returns to shareholders. I'm even more confident in the foundation we're setting to position VF for sustainable long-term growth and value creation.

Thanks, Steve, and good morning, everyone. We are pleased to report another strong quarter with balanced growth across our largest brands and strategic platforms. We continue to track ahead of the financial targets established at the beginning of the year as well as the long-range plan commitments we laid out in Boston nearly 2 years ago. We continue to invest in our strategic priorities, and we are increasingly encouraged by the returns that we're seeing. These proof points give us even more confidence that our growth trajectory is sustainable as we head into fiscal 2020.

Before diving into the results for the quarter and our increased outlook for the full year, I'd like to provide a brief update on the upcoming Kontoor Brands spin-off.

We filed the initial Form 10 registration statement with the SEC in mid-December. We remain on track for a public filing in early March. However, the government shutdown has the potential to delay the public filing. We will keep you posted as our time line evolves. Both VF, or RemainCo, and Kontoor Brands will host investor roadshows in the coming months leading up to our anticipated separation date at the end of April.

So now let's review the results of the third quarter. Total revenue increased 10% driven by strength across our core brands, including our international and direct-to-consumer platforms. Organic revenue increased 9% or 12% excluding Kontoor Brands. Organic D2C revenue increased 11% with 23% growth in digital and a 12% increase in total comp sales. Excluding the impact of acquisitions, our store count was essentially unchanged versus a year ago.

Our wholesale business increased 7% organically led by 35% growth in China and a high single-digit growth in the U.S. Importantly, excluding Kontoor Brands, wholesale increased at a low double-digit rate on an organic basis as we saw strong sell-through across key channels and accounts during the holiday season. We are well positioned as we head into fiscal 2020, and initial order book indications are strong across the portfolio.

On an organic basis, growth was also balanced geographically. The U.S. grew 9%, while our international business posted 8% growth led by 23% growth in China. Excluding the impact of acquisitions, total Asia increased 16%; Europe increased 4%; and our non-U. S. Americas business increased 7%. And while the geographic mix has evolved differently, we expect high single-digit organic international growth in the second half, in line with the results of the first half.

Our European growth is broad-based and strength across most brands and countries. When compared to the exceptional performance in the region last year led by The North Face and Vans, growth has moderated somewhat, but it remains diversified and ahead of our long-range plan. We remain on track to deliver organic mid-single-digit revenue growth for Europe. Excluding Kontoor Brands, our European outlook for fiscal 2019 includes high single-digit organic growth.

Our Big 3 brands increased at a combined rate of 16% in the third quarter. Vans' strong momentum continued with 27% growth, and the business remains well diversified as balanced growth across all regions, channels and product categories continues. Vans' D2C business generated total comps of more than 20% led by the digital business, which accelerated to 53% growth. We have, again, increased our full year outlook for Vans and now expect about 23% growth or 25% growth on a constant dollar basis for fiscal 2019. We are confident that the Vans brand can sustain low double-digit growth, in line with their 5-year commitment in fiscal 2020.

Our momentum in The North Face continues to build with growth of 16% led by the America's return to double-digit growth. The brand generated balanced growth across all regions and channels, providing further confirmation that our acceleration plan is on track. The brand's D2C business increased 11% led by 20% growth in digital. Strong sell-through drove a 21% increase in our wholesale business as shipments were accelerated to meet increased consumer demand. Sell-through across all channels was strong during the holiday season, and inventory at retail is in great shape. Given our recent performance, 2019 product pipeline and initial order book visibility, we are confident that The North Face can sustain high single-digit growth as we head into fiscal 2020.

The Timberland brand grew 3% driven by high single-digit growth in North America and 17% growth from digital. In North America, our diversification strategy continues to unfold with balanced growth across both Classics and non-Classics. Timberland PRO also remains strong with 10% growth. Our international business was softer than expected driven mainly by Europe due in part to unfavorable weather trends primarily impacting our Classics business. In Asia, Timberland's China business remains strong with more than 30% growth, offset by weakness elsewhere in the region. Looking at fiscal 2020, we expect low single-digit growth for the brand.

Finally, our Work business recorded another solid mid-single-digit organic growth quarter with balanced strength across the portfolio. Dickies grew 6% led by nearly 20% growth in China. We continue to make great strides in the integration, notably the further rollout of our product segmentation strategy with key accounts. The Red Kap and Wrangler RIGGS brands also performed well.

We are updating our outlook for the Work business and now expect between 5% and 6% growth for fiscal 2019, including accelerated growth in the fourth quarter, on an organic constant dollar basis. We expect our Work portfolio to continue to generate solid mid-single-digit growth, in line with our long-range plan as we head into fiscal 2020.

Moving down the P&L. Gross margin expanded 60 basis points to 52.2%, as our largest fastest-growing businesses and platforms continue to drive favorable mix. SG&A as a percentage of revenue declined 210 basis points due to strong leverage and some phasing of expenses and investments, but more on that later.

Operating margin expanded 270 basis points to 16.6%. Operating income grew 28% on an organic basis, which includes the impact of a slight decline in operating profit in Kontoor Brands.

EPS increased 30% to $1.31 a share. Of note, we repurchased $150 million of stock during the quarter using the proceeds from the sale of Reef. We have assumed no additional share repos for the remainder of the year.

Turning now to our updated outlook for 2019. Given our strong results for the third quarter and our increased confidence in our growth outlook as we look into fiscal 2020, we expect full year revenue to now be at least $13.8 billion, representing 8% organic growth on a constant dollar basis. We now expect FX to impact recorded revenue by about 130 basis points, including about a $40 million negative impact relative to the outlook we provided on our October call. Excluding Kontoor Brands, our updated outlook reflects growth of about 11% on a constant dollar basis.

Our gross margin is now expected to be at least 51%. We are expecting a full year operating margin of about 13.6%, including $45 million of incremental investment relative to the outlook we provided in October. The majority of the incremental investment will impact fourth quarter earnings.

And lastly, we are again raising our full year EPS outlook to $3.73, representing 19% growth in fiscal year 2019, including about $0.09 of incremental investment and some additional pressure from FX.

I'd like to spend a few minutes and provide some additional context relative to our revised 2019 outlook. In the first half of 2019, on an organic basis, revenue and EPS increased by 8% and 19%, respectively. Excluding Kontoor Brands, organic revenue and EPS was 11% and 25%, respectively. Our revised second half outlook includes organic revenue and EPS growth of 8% and 14% on a constant dollar basis. Excluding Kontoor Brands, our outlook reflects 11% revenue and 20% organic earnings growth, building on the momentum from the first half.

And for you modelers out there, a little more clarity on our implied fourth quarter outlook. First, we'll see the largest impact of FX for the year in the fourth quarter, which will impact our growth rate by about 3.5 percentage points on the top line and 5 percentage points on the bottom line. The divestitures of Reef and Van Moer will impact revenue and earnings comparisons by about $65 million and $0.02 of EPS. And the majority of the $45 million of incremental investments are in the fourth quarter.

And finally, relative to gross margin, our implied outlook includes a slight increase for the fourth quarter. However, excluding Kontoor Brands, gross margin is expected to expand by at least 50 basis points.

So with a few months remaining in year 2 of our 5-year plan, we continue to execute well. Our momentum and increased confidence in our growth trajectory has allowed us to, again, reinvest back into our business and fuel growth while, at the same time, over-delivering on our financial commitments.

VF, or RemainCo, is delivering high single-digit organic revenue growth and mid -- and high teens earnings growth a few years earlier than our Investor Day commits. Margins are expanding, and we are investing against our strategic growth imperatives. And with more than $1.5 billion expected in free cash flow this year, our leverage metrics are essentially back in line with pre-WD acquisition levels. This gives us optionality to both pursue our M&A agenda and maintain superior cash returns to shareholders. We are confident with how our portfolio is positioned today and look forward to sharing our fiscal 2020 outlook for VF RemainCo on our next call together in May.

I guess, just looking at third quarter, North Face, really nice to see acceleration there. I was interested to see the 9% direct-to-consumer growth in contrast to the wholesale 25% growth. And I was wondering if you could just add some context to both of those. I know with the long-range plan, you have very big D2C and obviously, digital ambitions. And I know the brand is well spread through a lot of the wholesale channel that you wanted to be in, in this point. In fact, I think you pulled back some over the past few years. How do you look at that wholesale growth rate as -- how much of that is coming from new distribution versus like door growth? Maybe just add some context to that on how you see wholesale for that business going forward, if that's maybe some of a resale as you kind of get momentum in the brand. Or how should we think about that?

Yes, Michael. Scott here. I'll start that at least. The -- first of all, it's -- there is a little bit of shifting. As we talked about in Q2, there's some orders that shifted to the right. We also said in the prepared remarks that based on strong demand and sell-through, we saw a little bit from the fourth quarter come into the third quarter, which puts a little bit of a distortion if you just isolate on Q3's wholesale. And that's why we tried to show you first half, second half and give you a better -- a more balanced perspective. But I would say, in general, what we're seeing is not necessarily new distribution. It's really seeing more velocity sell-through and maybe slightly more penetration as the brand has gained a little more momentum and heat, but not so much like opening up a new -- a big new customer or things like that. Steve, I don't know if you want to add maybe.

And I'd add to that, Michael. What you're seeing really is the result of 2, 3 years of really intense work of cleaning up the marketplace, segmenting the customer base, and now placing the appropriate products in each of their key retail partners, be it specialty to some of the large nationals. You're seeing an improvement in quality of products, so that is resulting in the velocity of sell-through that prompted that pull forward of the Q4 into Q3, giving you that distortion in the wholesale number. But we continue to be very confident in our D2C numbers. The results that we delivered this quarter are right in line with our expectations. We do see opportunities to improve. And ideas there would be strengthening the retail environment, stronger merchandising, a more focused big seasonal stories as the product offers continue to improve in the coming seasons.

Yes, Michael, just -- I don't know if it helps, but our long-range plan on the brand from a wholesale standpoint, going back to that topic, is mid-single digits, and that's still what we see over a long period of time. So I don't know if you're trying to model it going forward but yes.

No, just curious how it's emerging with some of the growth rates above and below the long-range plan. But on -- I guess, looking forward on Vans, it looks like your planned, x currency, about 15% growth in fourth quarter. So if we put that together with the third quarter and look at second half, it looks a lot like what you've been telling us the back half was going to look like. It wasn't going to slow as much as some people feared, if there's some -- I guess, some fashion element or trend element to the Old Skool, in particular. And you did add some color about the Slip-On's taking over as a bigger percent growth driver. I guess, you made -- you did make some comments that next year will be low double digits, in line with your long-term plan. Would you help us add any context you can at this point? It seems like some of the product portfolio that's driving the growth is turning over. What gives you confidence? Obviously, we can see that you're comping the comp here. But can you help us think about how you're building up to the low doubles for next year based on where the product portfolio is going today?

Yes. I guess, this is unusual at this point of the year that we would give you shaping on 2020. But the reason we did is we wanted to convey our confidence that we're not hitting a wall here or some of the things that we've heard questions back from your side of the community, not necessarily you specifically. So we look -- we see our order book. We see our trends. We're looking at forward. The consumer feedback that we're seeing in our online environment and our database show. We have confidence in our long-range growth. Could it be a little better? As I said at the very beginning of the year, it could be better. We really haven't seen the brand slow down materially. Again, at some point, the laws of gravity do reestablish themselves. I think the most important thing to remember is we have confidence in the long-range plan. And so far, we really haven't seen that slow down. And we're really encouraged. I'm glad you picked up on that, Michael, because the resurgence of the Slip-Ons is just a proof point of not just one thing. And we think that's a great thing to keep in mind as you think about the forward growth trajectory of Vans.

I wanted to follow up on Europe. You talked about a little bit of moderation. I was hoping you could maybe drill down by region. Are there any countries that you're seeing particularly lag at this point? And then with Vans Europe specifically, you've had 2 consecutive quarters of kind of 9% to 10% constant currency growth. I know you guys have made some wholesale adjustments, but I'm just curious. Is this the right way we should think about the business if you kind of think about the shaping into 2020 for Europe specifically?

Yes. Erinn, maybe I'll start there. So it's true that our Europe business has moderated compared to last year. But it's also important to remember, last year grew at 12%. And so we would say that you're comping a hard comp. And even with the moderation in growth, we're still tracking at/or above our long-range plan. So we would say our business has -- is stable on a constant currency basis and still tracking ahead of our long-range commitment. So I think it's important to keep that perspective in mind.

And on a higher level to your Europe comment, Erinn, we really -- we watch all the countries that we're all aware of, U.K., Italy, France, where we see particular political issues. But we really have not seen it have a dramatic impact on our business. We continue to see good balanced growth and tracking right along our long-range plan.

And I guess -- and the other part of your question, I think, what's behind that, Erinn, is, is this kind of growth rate what we should expect for Vans in Europe? In our recent Investor Day, we talked about high single-digit growth, and we're confident that, that is absolutely doable. Right now, we're tracking, I guess, a little bit ahead of that. So I'd say you should not think of a material change in trajectory of the Vans business in Europe.

Okay, that's helpful. And then on Timberland, it was nice to see a pickup in North America. I'm curious if you could talk about some of the collaborations you've done with that brand. It seems like it's starting to pick up a little bit. Would love to hear how that's being received. And then I know Europe, you commented on weather for Timberland being a bit of the headwind there. But curious again just the product piece, how are you feeling about the receptivity there with some of the newness you've infused?

Not surprised you picked up on Timberland's activity in collabs. I think that's something they've all been -- they've been very good at. But I think what you see now is a more methodical in aligning with collabs that really help enhance and grow the brand and using the boot and finding ways to really spark greater interest in how that -- the classic category comes to life for consumers. In Timberland Europe, we did see a slowdown in our business. We don't -- really, we don't see that changing our long-term view of the brand. I think the positive is, to really to focus on here is the diversification strategy that we've been talking about for the last number of quarters. We really see that taking hold. In Europe, our non-Classics, including women's, grew over 20% for the quarter, and we saw double-digit growth in those same categories here in North America. And oftentimes, we forget the power of our Timberland PRO business. That was up double digits for the quarter. What we saw was some softness in the boot category in Europe specifically. We do really relate that to the weather and really continuing to drive forward on the diversification strategy, the addition of Christopher Raeburn as the brand's global creative director and placing a new design director in this business. We're just methodically moving along our reset plan to put this brand back in place to deliver its portion of our 5-year growth plan.

I guess, on the gross margin front, as we think beyond this year, any larger-picture change to the 40 to 50 basis point tailwind that you've been seeing from mix? And then is it still fair to think about the remaining margin components between product cost, pricing and FX? I think you've said in the past that that's basically a wash. Is that kind of best to think about the mix and then the remaining component?

The short answer is yes and yes. The 50-plus-or-minus basis points we see and even of note, in the fourth quarter, we -- if you look at RemainCo, the 50 basis point mix we see in our implied guidance, there's a little bit of a drag from both FX and Kontoor in the overall margin. And as we look forward, again, we're not giving guidance, but we've said consistently, we see that 50 bps going forward. Input costs, over time, our assumption has been and history has proven, have ebbed and flowed, but pricing has at least offset that and, in some cases, given us a rate increase. So that's a long way of saying we're really -- we're still really comfortable with where we're at. We're seeing good evidence of those margins falling through and expect that would be true going into next year.

That's great. And then more from a category perspective. On Jeanswear, can you just touch on the drivers behind the 3Q decline, the full year guide reduction there, and just how to think about this segment going forward?

Yes. Maybe I'll start there. So in the third quarter, profitability was fairly flat. If you look at the implied guidance, it suggests in the fourth quarter, there will be a pullback. And I guess, I would say, we're going to let the Kontoor group talk about what the future looks like. But a little bit of perspective, one of our jobs, as we prepare for the spin, is to prepare this company, along with the Kontoor management, to give them a solid platform and the best opportunity for success going forward. And that means we're -- frankly, we're cleaning up a few things. There's some inventory given the Sears bankruptcy that's a little elevated. We're working to get that down. Or I should say, the Kontoor team is working to get that down, and they'll make progress on that by the end of the year. Underperforming doors in certain markets where we don't see big opportunities, we're looking to rationalize. And important to note, on the supply chain, as you think about optimizing the supply chain for Kontoor going forward, we have historically had comingled products. We're moving products into Kontoor-only plants or vice versa, VF. And when you make those moves, you have short-term disruptions, which increase cost. Your efficiencies go down. But that's short term, and that's episodic. That has a beginning and an end. And as you think about going forward, optimized focused supply chain around the unique business model of the Kontoor business is going to be better for them and will continue to be that strategic weapon that they've seen historically going forward.

And, Matt, let me add. Kontoor has, in Wrangler and Lee, 2 of the most iconic brands in America. We've got a very experienced management team. We've got a supply chain that has been a historical strength, and it's evolving to be in line with where this brand sees itself going. And we need to look more long term on what the brand -- what this suite of brands is capable of as we move through the work we're doing to prepare these brands to be stood up as their own separate public company.

Yes. And, Matt, just one other perspective that may be helpful. I don't know if it's behind your question. But a lot of this short term stuff, the timing of the Sears bankruptcy, other things like that, while the timing is hard -- was not necessarily easy to predict, as we think about our model and our expectations for the business going forward, it's really unchanged. So you got to -- I would encourage you to look past some of the short-term noise that happens in a transition like this and focus on the strength of these brands, the model, the consistency going forward, and that's really what we see going forward. And I think as you talk to Kontoor in the roadshow, those will be the themes that they develop.

I want to follow up on the wholesale guidance for the year. It was raised nicely from originally 9% to 10% to now 11%. This would suggest 4Q wholesale revenue would grow in the mid-teen rate on an organic basis. Is that the right way to think about it, Scott? And what are the brands that are driving that growth for the fourth quarter? And then how should we think of that number as a barometer for the out quarters?

Yes. So as usual, Laurent, I think you've got it. You might be a little hot, but high single-digit organic growth on the organic is kind of where we would say the implied guidance would take you. And it's the same brands that are driving through the year, right. So Vans, The North Face are the 2 biggest drivers.

Okay, very helpful. And then I wanted to shift focus on the strategic investments. I think they were up 12% in the first quarter, then up 8%, then now up 5%. I think you said in the prepared remarks you're going to increase that investment by $45 million in the fourth quarter. How should we think about these investments for the out year for 2020?

Yes. So again, I'd take you back to Boston and just remind you of the algorithm that we talked about. So in general, we said we would maintain our level of investment. As our revenue increased and we'll start to see leverage, that inflection point hit this year, and we expect to continue to see leverage as you look into next year and beyond. So that's the big picture. When we look at -- I think you should think about these incremental investments as an acceleration. It's not new initiatives. It's things on our road map where we see evidence of return, and we believe that by opportunistically advancing some of these investments, we can either shore up or even accelerate our top line growth. So the first commitment is to the shareholder and delivering on our commitments. And you can and will expect leverage next year when we get to the guidance. The other thing I'd say is if you're looking at the quarters, and I know you're in the bowels of the model right now. But that 5%, that -- of our strategic investments, that -- there's a steady state of investment around those strategic priorities. And I mentioned some phasing. There's some phasing of that baseline spending between Q3 and Q4. And in addition, we made an incremental $45 million investment since the last time we talked 90 days ago. So all that says there's some noise between Q3 and Q4. That's why we put in the prepared materials a first half, second half because I think that's more indicative of the underlying operating trend and performance of the business and kind of takes all that noise out, so that you can really see what's going on.

Yes, that's right. And again, Sam, I mean, we're not getting into the quantification. What I would just say to you, again, just repeating what I said to Laurent, just that's why the second half, in our opinion, is more indicative of the underlying trend of the business. Remember, a year ago, you had a stub period, you had year-end change. There was a lot of mechanics around that create some noise as you look at quarter-to-quarter. That's why I would just reiterate that the second half is the best look to try to get a bead on what the trend of the business is.

And then, well, I'm just going to ask the question. You talked about M&A and that you're well positioned for it. And yesterday, there was a little bit of a story going around, and I wanted to know if you wanted to discuss anything regarding Manhattan Beach, California?

I'll answer that, Sam. Obviously, M&A continues to be our #1 choice of capital allocation. And I think you all know us well, and you've seen how we have been reshaping our portfolio to align with where we see our strengths in the larger consumer marketplace across Active, Outdoor and Work. I would encourage you to remember those facts. And when you read things in the news like that, you don't necessarily always have to believe rumors.

Okay. And then just lastly, could you talk a little bit about sort of the momentum in North Face and the evolution of the Timberland business and sort of how you're thinking about The North Face and Timberland over the next 2 years on a growth and sort of brand positioning perspective?

Sure. I'll start. And if I leave something out, I know Scott will fill it back in. First, on The North Face, this is -- we've been on a multiyear journey where we started first to really reset that solid foundation with management, the work we did around cleaning up our distribution, the product segmentation, the advancements behind product. And I think now you see, really, an elevated brand voice that's pushing The North Face and their influence to the top of the conversation. And it's really coming from their focus on being purpose-led and the guiding principles that, that leadership team has put in place. I think how you can think about this going forward, Sam, is that you will continue to see this brand innovate. The FUTURELIGHT product that I mentioned in my report -- prepared remarks is a great proof point of our innovation engine working on specific technologies that help differentiate our brands. And you will begin to see a methodical cadence season by season, new platforms, new stories that continue to elevate The North Face as that lead Outdoor brand and really tipping up their influence. And we've committed to the 6% to 8% growth over the 5-year period. As we said in our remarks, we see that high single digit next year. The confidence that we have in the team, the strategy and how they're executing right now is what's reinforcing that. Timberland, it's really -- a lot of that same playbook that we've been talking about. We've reset our management team. We're surrounding that team now with really good design capability and creative talent, and that will only help enhance our work on diversifying the product offer while respecting the classics, building out these new growth vectors and the diversification into these more lifestyle, women's and outerwear that will put us in a position to achieve the mid-single-digit growth that we committed to in Boston. I'll be honest, Sam. We're a little bit behind that. But we were pretty clear what our trajectory would look like. Vans was strong. When we spoke with you all in Boston, we committed to North Face accelerating, and following The North Face acceleration would come Timberland. And we're really seeing that work nicely. And with the work vector that we've committed to, delivering on its portion of our long-term growth, we really feel confident about the plan we put forward and our ability to execute that.

Just circling back on Vans. In prior discussions over the past year, I think the conversation around Vans was centered around managing a soft landing. This quarter seems to -- not even seems, but clearly indicates that there's still a lot of growth and demand for the brand. And I think that in that prior soft landing sort of definition, you were really actively managing the wholesale piece with the DTC piece being the wild card. So the question relates to this low double-digit growth expectation that you laid out for next year. If you could just parse out how you're thinking about those 2 channels from a growth rate contribution perspective. Because it seems like you obviously have the ability to manage at wholesale, but it's this DTC component that continues to surprise at the upside. So I'm wondering what does that DTC component correspond to in that low double-digit expectation.

Yes. I guess, one thing before we even get into that. Just a reminder, since acquisition, this brand has grown at a mid-teen rate. And you think about the forward guidance at being at a mid-teen rate, so over a very long period of time, the brand has demonstrated its ability to find that growth path -- those growth paths on a consistent basis. Now if you think about D2C, high single to low double is what was in our long-range plan, and we still see that as the long range. Again, when we come from our current level of performance and moderate into that, law of big numbers, hard comps, eventually, we still believe that, that is the long-range growth path. Again, what makes it a little hard for Steve and I to get our hands on is so far, we have not seen -- even with the extremely large size of this business, we have still not seen that moderation at this point.

And, Camilo, this is one of our -- D2C and digital are one of our key strategic choices and the investments that we're making on an annual basis and where we're able to put additional dollars behind that strategy. Vans is a large part of what's informing those investments, and those dollars are being put to work there as they are in other brands. But their connection with their consumer, the growth of their loyalty program, how they use that digital platform, our customs platform, it really is hard to call when you have a brand that has such an intimate connection with a very unique and specific consumer group. And they're able to execute that both online and in-store in a way that's consistent with their overall culture. We've modeled it to the best of our ability, and we do believe, over time, that's where it will settle in. But right now, as this brand resets itself and it claims that #3 spot, we're really happy with the growth. And we will continue to invest behind it because we think that is the differentiator for them, but it's also the differentiator for our larger platform of brands and how we'll be able to leverage that across our other big consumer-focused businesses.

I'd just add one thing. You noticed, I think I commented earlier that we unusually for this point in the year gave some shaping to next year. And we have visibility not quite as far in footwear as we do in some of the other businesses. But through late spring, let's say, we can see visibility on the order book, and that gives us confidence that we're not going to see a massive slowdown from the wholesale side looking into next year. So that's probably one of the things behind your question. Again, we do have more forward visibility. And from everything we can see, we continue to see that momentum.

Just to clarify, so with that comment on the wholesale piece you just made, Scott, it seems like the implied DTC in this low double-digit expectation is actually more conservative than the rate that you've been running at. Is that -- am I thinking about that correctly?

Got it. And then just my second question. You've given great color on the region and what you're watching out for from a macro perspective. I was just hoping to get maybe some high-level color on the inventory in the channel of the Big 3 brands by region and how you feel that looks coming out of the season.

Yes. I guess I would just say, in general, inventories at retail and in our own are generally clean. And I would say, even very clean. There are a few pockets I mentioned in Kontoor inventory in our -- in the VF inventory we own is elevated from where they -- that team wants it to be, and we're taking actions to bring that in. But when you look at it in the total of VF, we're happy with where we're at. We're in good shape.

A couple calls back, you talked about the transforming of the industry and what's happening in the apparel world. And you talked about refurbished goods and how each of the different brands would be transforming itself a little bit in how they distribute goods or how they sell goods. What are you seeing there, whether it's a sustainable part, whether it's subscription, whatever it may be? What are you seeing there? And how are you planning? And then on another note, just Workwear, any updates on Workwear and what you're seeing there in terms of demand and growth and product initiatives for next year? And lastly, just components of SG&A and how they're planned.

So, Dana, I'll start with your first question on how we're looking at some of these new models that clearly, the consumer is driving across pretty much the broad global space. We've had a couple pilots that we spoke to you about, North Face, most notably, looking at really taking back products, refurbishing those products and then putting them back out for sale. We have a couple rental pilots that have been underway with our Kipling brand, most notably in Europe. And in all cases, these have proven to be very positive, very successful in advancing our ability to work more one-on-one with our consumers. So we will continue to expand on that. It's an area where we see investment not only here within the corporate center and being able to strengthen our understanding to build partnerships that will benefit our brands, but it's also helping our brands find these places where they can connect and look for these new growth vectors beyond traditional wholesale and D2C. In the case of Workwear, we -- what you see happening there is really the portfolio of brands that we've assembled here. Our historical strong brands like Red Kap and Bulwark, Timberland PRO on the top end of our segmentation and in the middle sits Dickies, working on bringing innovative products both in footwear and apparel. We've got some really interesting products around enhancing motion in apparel. Dickies bringing elements of stretch to their apparel. Red Kap really having been the key innovator there, partnering with some of our Outdoor brands and understanding how to bring stretch into performance apparel of bringing it to Work to enhance the workers' experience and comfort in their day-to-day life. But I would tell you, the most important thing around Work is we see an evolving trend, not only here in North America but in Europe, of this emerging makers community. And we are extremely well suited with our portfolio of brands to play to that consumer, to participate in how they begin to define themselves. And this is the area where we bring our brand-building capabilities to bear and really position ourselves, define ourselves to these consumers and place ourselves in their everyday life to enhance their experiences. And you can really see this taking shape in much of our social media campaigns, specifically with Dickies right now, but really confident in where we are with our work evolution. And I'm happy to let Scott talk to you about the SG&A question.

It's going to be mostly around Work now. Just kidding. So the SG&A algorithm is really unchanged, Dana, from what we talked about in the Boston plan. There, we're focusing on distorting our investments against our strategic priorities, which we've consistently laid out, things like demand creation, data, digital technology, our global business technology, advanced manufacturing, innovation, et cetera. And then we're getting leverage on the back end of the business. That's the power of our platforms, right? And so when you think about continue to invest in those drivers of growth, accelerating top line and then leverage on the back end, that's how you, at the VF level, see that gross -- or sorry, the operating margin expansion through the combination of gross margin expansion and SG&A leverage.

You mentioned at the beginning there that you were closely monitoring the situation in China, and you've given some helpful color on your thoughts on that market before. Across the board, you saw pretty strong trends in that market and acceleration from the last quarter. I wonder if you could dive into that a little bit, how you're seeing the strength of the consumer, maybe how that splits across different consumer groups or areas of the country. And at this stage and time, thoughts on the outlook there.

Great. Well, I'll go ahead and start, and Scott can fill in the blanks. Where we see the consumer is really through the lens of who are our specific consumers. In general, the economy, though slowing, is growing well, and our consumers, in the price points that we bring to the market, continue to resonate. And we feel we are in a really strong position in how our brands present themselves, specifically through a lifestyle component, the products from a seasonal basis, and the price points position us very well to continue to compete, continue to grow. And I would just remind you that our penetration or overall brand awareness continues to have tremendous upside. And as we grow and grow our influence, we'll see those numbers grow. But today, where we are, there continues to be a tremendous amount of headroom for us to grow in.

And just putting some numbers around that. If you -- we saw a pretty meaningful acceleration in our China business this year, approaching high teens, approaching 20%. And in fact, if you look at VF RemainCo, it's in the mid-20s this year after high single digits a year ago. So nice acceleration in the business, and that gives us confidence in our forward look for the region.

Well, thank you, everybody, for joining us today. I would love to just start off by complementing and thanking our VF team across the globe. We have absolutely increased our metabolic rate. We have been doing a lot over the last 24 months to evolve and reshape ourselves into the company that you see us emerging as. And we could not do that without the talent and the commitment of our people.

We're intently focused on executing our strategic plan. We're excited to help our Kontoor colleagues position themselves to stand up as an independent publicly traded company here as we move into the second quarter and position themselves for strength but concurrently position VF to continue our transformation and our long-term growth plans.

So thank you for joining us today, and we look forward to talking to you in May.